Boom–bust cycle, asymmetrical fiscal response and the Dutch disease
This paper investigates the changes in expenditure policy in oil-exporting countries during boom–bust in commodity price cycles, and their implications for real exchange rate movements. To do so, we introduce a Dutch disease model with downward rigidities in government spending to revenue shocks. This model leads to a decoupling between real exchange rate and commodity export price movement during busts. We test our model's theoretical predictions and underlying assumptions using panel data for 32 oil-exporting countries over the period 1992 to 2009. Results are threefold. First, we find that changes in current spending have a stronger impact on real exchange rate compared to capital spending. Second, we find that current spending is downwardly sticky, but increases in boom time, and conversely for capital spending. Third, we find limited evidence that fiscal rules have helped reduce the degree of responsiveness of current spending during booms. In contrast, we find evidence that fiscal rules are associated with a significant reduction in capital expenditure during busts while responsiveness to booms is more muted. This raises concerns on potential adverse consequences of this asymmetry on economic performance in oil-exporting countries.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jonathan Eaton & Samuel Kortum, 2001.
"Trade in Capital Goods,"
NBER Working Papers
8070, National Bureau of Economic Research, Inc.
- Jonathan Eaton & Samuel Kortum, 2000. "Trade in Capital Goods," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-109, Boston University - Department of Economics.
- Jonathan Eaton & Samuel Kortum, 2004. "Trade in Capital Goods," Levine's Working Paper Archive 228400000000000019, David K. Levine.
- Rodrigo O. Valdes & Eduardo Engel, 2000.
"Optimal Fiscal Strategy for Oil Exporting Countries,"
IMF Working Papers
00/118, International Monetary Fund.
- Eduardo M.R.A. Engel & Rodrigo Valdés, 2000. "Optimal Fiscal Strategy for Oil Exporting Countries," Documentos de Trabajo 78, Centro de Economía Aplicada, Universidad de Chile.
- Engel, Eduardo & Valdés, Rodrigo O., 2001. "Optimal fiscal strategy for oil exporting countries," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 34818, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
- Alberto Alesina & Roberto Perotti, 1994. "The Political Economy of Budget Deficits," NBER Working Papers 4637, National Bureau of Economic Research, Inc.
- R Blundell & Steven Bond, .
"Initial conditions and moment restrictions in dynamic panel data model,"
W14&104., Economics Group, Nuffield College, University of Oxford.
- Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
- Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
- Blundell, R. & Bond, S., 1995. "Initial Conditions and Moment Restrictions in Dynamic Panel Data Models," Economics Papers 104, Economics Group, Nuffield College, University of Oxford.
- Marcela Eslava, 2006.
"The Political Economy of Fiscal Policy: Survey,"
Research Department Publications
4487, Inter-American Development Bank, Research Department.
- Markus Bruckner & Rabah Arezki, 2010. "International Commodity Price Shocks, Democracy, and External Debt," IMF Working Papers 10/53, International Monetary Fund.
- Kareem Ismail, 2010. "The Structural Manifestation of the â€˜Dutch Diseaseâ€™; The Case of Oil Exporting Countries," IMF Working Papers 10/103, International Monetary Fund.
- Dermot Gately, 1992. "Imperfect Price-Reversibility of U.S. Gasoline Demand: Asymmetric Responses to Price Increases and Declines," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 179-208.
- Francesco Caselli & Daniel J. Wilson, 2002.
Federal Reserve Bank of San Francisco, issue Nov.
- Philip Keefer & Stephen Knack, 2007. "Boondoggles, Rent-Seeking, and Political Checks and Balances: Public Investment under Unaccountable Governments," The Review of Economics and Statistics, MIT Press, vol. 89(3), pages 566-572, August.
- Jonathan Isham & Michael Woolcock & Lant Pritchett & Gwen Busby, 2005. "The Varieties of Resource Experience: Natural Resource Export Structures and the Political Economy of Economic Growth," World Bank Economic Review, World Bank Group, vol. 19(2), pages 141-174.
- Raghuram G. Rajan & Arvind Subramanian, 2014.
"What Undermines Aidâ€™s Impact on Growth?,"
- International Monetary Fund, 1999. "Macroeconomic and Sectoral Effects of Terms-of-Trade Shocks; The Experience of the Oil-Exporting Developing Countries," IMF Working Papers 99/134, International Monetary Fund.
- Dermot Gately, 1993. "The Imperfect Price-Reversibility of World Oil Demand," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 163-182.
- Raghuram G. Rajan & Arvind Subramanian, 2005. "What Undermines Aid's Impact on Growth?," NBER Working Papers 11657, National Bureau of Economic Research, Inc.
- Fabrizio BALASSONE & Maura FRANCESE, .
"Cyclical Asymmetry in Fiscal Policy, Debt Accumulation and the Treaty of Maastricht,"
- Fabrizio Balassone & Maura Francese, 2004. "Cyclical asymmetry in fiscal policy, debt accumulation and the Treaty of Maastricht," Temi di discussione (Economic working papers) 531, Bank of Italy, Economic Research and International Relations Area.
- Mauricio Villafuerte & Rolando Ossowski & Theo Thomas & Paulo A. Medas, 2008. "Managing the Oil Revenue Boom; The Role of Fiscal Institutions," IMF Occasional Papers 260, International Monetary Fund.
- World Bank, 2009. "World Development Indicators 2009," World Bank Publications, The World Bank, number 4367.
- Melitz, Jacques, 1997. "Some Cross-Country Evidence about Debt, Deficits and the Behaviour of Monetary and Fiscal Authorities," CEPR Discussion Papers 1653, C.E.P.R. Discussion Papers.
- Corden, W M, 1984. "Booming Sector and Dutch Disease Economics: Survey and Consolidation," Oxford Economic Papers, Oxford University Press, vol. 36(3), pages 359-80, November.
- Corden, W Max & Neary, J Peter, 1982. "Booming Sector and De-Industrialisation in a Small Open Economy," Economic Journal, Royal Economic Society, vol. 92(368), pages 825-48, December.
- van Wijnbergen, Sweder J G, 1984. "The 'Dutch Disease': A Disease after All?," Economic Journal, Royal Economic Society, vol. 94(373), pages 41-55, March.
When requesting a correction, please mention this item's handle: RePEc:eee:deveco:v:101:y:2013:i:c:p:256-267. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.